Offshore participation key to this weeks swap direction and Thursday's DMO offer

By Kymberley Martin

It was a very quiet end to the NZ week with swap yields closing up around 1bps across the curve. On Friday night, US 10-year yields dribbled lower from 2.78% to 2.74%.

NZ 2-year swap closed at 4.02%, comfortably within the 4.0%-4.1% range it has traded for the past week.

If we see some dissipation of recent offshore receiving interest, it could easily push higher on the back of payside flow from the real economy.

RBNZ data shows there is still up to 75% of all mortgages floating or fixed for less than one year. But we are seeing increased hedging activity. We continue to see 2-year ‘fair value’ around 2.30% based on our forecast OCR track. i.e that the RBNZ will steadily raise the OCR to 4.0% by the end of this year and 5.0% by the end of next.

The 2-10s swap curve has steepened to 108bps from below 100bps at the start of last week. We target 110bps as an exit level from near-term steepening. Longer-term we expect the 2-10s curve to flatten to a trough of 60bps over the coming 12 months.

Meanwhile the yield on NZ 10-year bonds sits at 4.62%, near the top of its very tight 4.50-4.65% range of the past two months.

More broadly, we anticipate a 4.50-5.10% range in the coming year.

We see limited NZ DMO issuance limiting the sell-off in NZGBs despite a rising underlying OCR. In this regard this Thursday’s tender of $200m of NZGBs will be closely watched, particularly for offshore participation.

On Friday night, in the absence of key data releases, US benchmark 10-year yields drifted slightly lower, within recent ranges, to end the week at 2.74%.

We continue to see a 2.5%-3.0% range in coming months, though the top-side of the range could extend to 3.25% in the year ahead.